Accounting Chapter Two

Non manufacturing costs (AKA period costs) are divided into what two categories?

Selling costs and Administrative costs

What are the three manufacturing costs?

-direct materials -direct labor -manufacturing overhead

What are variable costs and what are their characteristics?

A variable cost varies, in total, in direct proportion to changes in the level of activity. Examples would be, costs of goods sold,direct materials, direct labor, variable elements of manufacturing overhead. To be variable, it must be variable with respect to something, an activity base or cost driver

What are administrative costs?

All costs associated with the general management of an organization rather than with manufacturing or selling. Examples include, executive compensation, general accounting, secretarial, and public relations.

What is manufacturing overhead?

All manufacturing costs except direct materials and direct labor. This includes indirect materials, indirect labor, heat, light, property taxes, depreciation, insurance on manufacturing facilities, and maintenance and repairs on production equipment.

What are the non manufacturing costs?

Period costs

What is a sunk cost?

a cost that has already been incurred that cannot be changed by any decision made now or in the future.Because they cannot be changed they are not differential costs, therefore they are irrelevant.

activity base

a measure of whatever causes the incurrence of a variable cost. aka cost driver. Examples are, direct labor hours, machine hours, units produced, and units sold.

Contribution Format Income Statement

clearly distinguishes between fixed and variable costs

Fixed cost

cost that remains constant, in total, regardless of changes in the level of activity. Examples would be, straight line depreciation, insurance, property taxes, rent, supervisory salary, administrative salary, and advertising.

Traditional Format Income Statement

prepared primarily for external reporting purposes. it organizes costs into two categories, cost of goods sold and selling and administrative expenses.

What are selling costs?

selling costs include all costs that are incurred to secure customer orders and get finished products to the customer. Sometimes called order-getting and order-filling costs. Examples would be advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses.

what is the contribution margin?

the amount remaining from sales revenue after variable expenses have been deducted. This amounts contributes toward covering fixed expenses and then towards profit for the period. It is used as an internal planning and decision making tool. It has emphasis on cost behavior that aids cost-volume profit analysis, management performance,and bugeting.

What is a differential cost?

the difference in costs between any two alternatives. AKA incremental cost, can be either fixed or variable.

What is an opportunity cost?

the potential benefit that is given up when one alternative is selected over another. They are not usually found in accountng records but they are explicitly considered in decision making.

What is a conversion cost?

the sum of direct labor cost and manufacturing overhead cost. the term "conversion" is used because these costs are incurred to convert materials into the finished product.

What is a prime cost?

the sum of direct materials cost and direct labor cost